Health plans’ financial performance

In a shifting market, it is “advantage” Medicare for health plans

by

Andy Davis, FSA, MAAA
Jeff Burke, ASA, MAAA
How Peng Zhir, FSA, MAAA
Maulesh Shukla
Hemnabh Varia

Many organizations face the same quandary: how to effectively link financial goals to the organization’s broader business goals. Choosing where to invest, determining what strategic decisions to make, identifying the right business mix, and understanding where improvements can be made, can all contribute to an organization’s financial performance and its ability to stand out from its peers. After all, an organization’s economic health is often directly related to its overall well-being.

For the US health insurance industry, several policy reforms (e.g., passage of the Affordable Care Act), unprecedented market events (e.g., the COVID-19 pandemic), and changing consumer preferences (e.g., greater affordability) have all impacted business over the last decade. In general, health plans have responded by learning how evolving regulatory and consumer needs impact their lines of business, creating better risk mechanisms, and increasing merger and acquisition (M&A) activity. However, some health plans have fared better than others.

To understand how health plans are performing financially, why their business performances vary, and what health plans that have financially outperformed their peers are doing differently, the Deloitte Center for Health Solutions analyzed the regulatory filings of health plans’ fully insured business lines (see “Appendix: Methodology,” for more details).

The findings suggest that health plans with an increased share of Medicare Advantage (MA) in their business mix have consistently outperformed their peers on revenue and profitability over the last decade. Health plans’ financial future will likely depend on having the right business mix and making strong investments today.

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Health plan profitability is at one of its lowest levels in a decade

Revenue and underwriting profitability are crucial dimensions of a health plan’s financial performance. While revenue has shown a healthy trajectory in the past decade, the analysis conducted by the Deloitte Center for Health Solutions shows health plan profitability has hit one of its lowest points since 2012.

US health plan revenue in 2022 was at US$1.2 trillion, up from US$0.5 trillion in 2012. The average annual growth rate—9.3%—is significantly higher than the average annual GDP growth (2.1%) and average 10-year inflation rate (2.3%) over the same period.¹ The analysis shows growth driven evenly by enrollment growth and pricing increases.

From a low of 1.9% in 2015 due to policy-driven market turbulence, the underwriting margins grew gradually, reaching a high of 4.2% in 2020 (figure 1). The pandemic led to canceled and delayed medical procedures, resulting in one of the lowest medical loss ratios (83.5%) in decades. As a result, health plans recorded outsized underwriting profits (more than US$40 billion) in 2020.² There has been intense media and expert scrutiny on higher health plan profitability over the pandemic.³

However, with the return of medical procedures and increased medical unit costs, the medical loss ratio in the last two years reached more than 87%. As a result, underwriting margins fell to a seven-year low of 2% in 2022. The recent performance has more than offset those gains over the pandemic: On average, the underwriting margins of 2.8% in the last three years (2020–2022) were lower than the 3.2% from the preceding three-year period (2017–2019).

Health plans’ government lines of business now command the lion’s share of revenue and profitability

Health plan revenue from the MA business grew more than three-fold in the past decade, driven by enrollment growth due to an aging US population and increasing consumer preference toward MA (versus Medicare’s fee-for-service program).⁴ Medicaid managed care, health plans’ other major government business, also had a healthy average annual revenue growth rate of 15% from 2012 to 2022. The growth rate was driven by policy (Medicaid expansion), pandemic-induced expansion, and economic cycle–driven enrollment increases (figure 2).⁵

While these government businesses have demonstrated high growth, the commercial market has been sluggish for health plans. Enrollment in the full-risk group business declined annually by 2% on average, due to demographic changes as well as greater employer preference toward administrative-services-only (ASO) arrangements.⁶ To compensate, pricing has been the key revenue growth mechanism. Premiums per member per month grew 5% on average annually in the last decade.

In the past decade, underwriting margins in MA have been consistently among the highest of all lines of business. The older adult population, especially those with higher care needs, has preferred supplemental benefits even at higher premiums.⁷ On the other hand, health plan margins in Medicaid managed care averaged 3% in the last three years after years of marginal profitability (less than 0.5%). This improved profitability is likely driven by pandemic-induced policy relief on enrollment, along with cost containment strategies such as negotiating lower reimbursement rates with health care providers.⁸

Health plan profitability in the commercial business has been on the decline in the last decade, especially for the large group business. Several health plans have reported client churn, with large employers preferring low-margin high-deductible plans, as well as ASO arrangements over full-risk business.⁹ In addition, employers have increasingly negotiated with health plans to improve benefits and manage pricing, and the latter have not been able to meaningfully reduce medical costs, pressurizing the margins.¹⁰

Meanwhile, small group business, though a smaller portion of group business (approximately 25%), has generated greater and more stable margins compared to large group business. Commercial individual business has been the most volatile of all the lines of business for health plans. Most health plans suffered significant losses in this business through 2017 due to mispricing even with the cushion of regulatory stabilization programs (reinsurance, risk corridors, risk adjustment).¹¹ Several health plans began to reduce their offerings and benefits and increase prices in 2017 to turn business around. As a result, profitability reached more than 10% in 2020. However, margins have been significantly lower in the last two years due to rebates distribution and increased medical costs post pandemic.¹²

Health plans that increased MA share in their business mix outperformed their peers

The top five health plans by revenue grew significantly higher (10%) compared to their peers (6.6%) annually between 2017 and 2022. For these top five plans, the share of MA in their line of business mix increased from 33% in 2012 to 47% in 2022 as their peers’ share of MA remained constant (figure 3). These five health plans served more than two-thirds of the total MA market in 2022. Investments into home care assets, retail expansion through M&A, the introduction of innovative plan designs, and the adoption of advanced analytics to assess members’ care and access needs have helped these top five health plans optimize revenue from the government and control the cost of care at scale.¹³

The analysis shows that the top health plans by revenue have consistently higher margins compared to the rest of the health plans, both in the MA business and overall (figure 4). When looking at underwriting margins in the MA business in the last decade, at least three percentage points separate the top five health plans from the rest of the plans each year. Higher MA margins help drive better overall business performances for the top health plans. For instance, the average overall underwriting margin for the top health plans in the last decade was 4% compared to 1.7% for the rest of the health plans.

Winning the market shift

As health plans set their strategies for the next five to 10 years, trends are emerging for each line of business that indicate financial success.

Medicare Advantage as a growth frontier

The older adult population in the United States is expected to grow to about 73 million by 2030 and 95 million by 2060.¹⁴ In addition, older adults are increasingly opting to enroll in MA over traditional Medicare because it offers additional benefits and lower (i.e., better) out-of-pocket cost limits.¹⁵ The share of MA beneficiaries as a percentage of total Medicare enrollment increased from 27% in 2012 to 45% in 2022 and is projected to reach 52.4% by 2030.¹⁶ This represents 57% growth (or 14 million new enrollees) between now and 2030.

Large health plans have focused their business strategies on MA and our analysis shows that this approach is paying off. Scale is directly proportional to profitability in the MA market due to more accurate risk coding that results in both higher revenue and lower administrative spending per member on average. For instance, the top 2 health plans in MA nationally now command more than 50% of the total MA revenue and 80% of the profits.¹⁷ However, 85% of the smallest quartile of health plans by revenue suffered losses in MA business in 2022. With MA poised for considerable growth in the next few years, health plans have an opportunity to achieve scale and potentially increase profitability. A few of the key factors that can help health plans achieve success in MA include:

Leaning on virtual health: With elderly members increasingly accustomed to virtual health as a means of access, interaction, and care, health plans might look for meaningful shifts in how care is delivered and new ways to lower the cost of care (e.g., engaging practitioners in parts of the country that cost less).
Using digital tools to make medical and administrative tasks more efficient: Health plans using digital and artificial intelligence (AI) tools for claims stratification, sophisticated risk adjustment, and other medical cost management programs may have greater success in reducing medical costs. As AI-powered technologies become more common and affordable, they will likely provide an opportunity for smaller plans to lower administrative costs and improve insights, thus leveling the playing field.
Creating differentiated branding: Health plans can focus on creating differentiated positioning based on their offerings (e.g., provider-friendly, community benefit, digitally agile) to attract, retain, and engage the older adult population.

Opportunistic bets in Medicaid managed care

Health plans have long had to navigate factors associated with Medicaid managed care such as state regulations and shifts in state budget priorities.¹⁸ However, opportunities in Medicaid increased when several states enrolled a greater number of enrollees through Medicaid managed care contracts. Majority of states (40+) have moved to managed care contracts, and some of the remaining states are planning to. Today, more than two-thirds of Medicaid beneficiaries receive care through health plans.¹⁹

Key factors that can help health plans succeed in Medicaid managed care include:

Addressing states’ priorities on social benefits: Several states are increasingly focused on a broader set of benefits (versus traditional care benefits) that may help them address health and access needs. Health plans that integrate benefits such as behavioral health and pharmacy and show progress on social determinants and health equity measures may have an increased chance of gaining state contracts, which can help gain scale and likely improve profitability.
Using data analytics and population health management: Medicaid plans grapple with high utilizers that often face access and health literacy issues. Health plans that utilize advanced data analytics capabilities and population health management strategies to identify high-risk populations, manage their conditions proactively, help them navigate the right care, and address the drivers of health, can improve member health outcomes as well as financial performance.
Strengthening provider networks: The 2020 Medicaid & CHIP Managed Care final rule amended time and distance restrictions for states to ensure provider network adequacy.²⁰ With this change, plans in many states can flex their provider networks, including direct provider outreach, member alignment with primary care physicians, and other financial incentives, helping them lower care costs and gain operational efficiencies.

Redefining the target markets in the commercial business

While enrollment in health plans’ commercial individual business continues to grow, enrollment in their fully insured commercial group business is expected to decline further as employers increasingly bear employee risk themselves. Enrollment in employer-funded ASO arrangements increased from 97 million in 2012 to 127 million in 2022.²¹ If these trends continue, enrollment in full-risk group business may decline by 2% annually through 2030, according to our analysis. Although growing sluggishly, the commercial group business has traditionally been the largest line of business for many health plans.²² If health plans can preserve their market share in the commercial business by being strategic and responsive to the evolving needs of employers and individual consumers, this business can still be profitable. The key factors that can help health plans succeed in the commercial lines of business include:

Assessing markets strategically: For the group business, health plans should identify the markets that may have turned unprofitable for them or may not provide a growth outlook, and pivot to more promising markets based on capabilities and competition.
Meeting consumer convenience expectations: Health care consumers may have different expectations than consumers in industries like banking or retail. That means that providing convenient solutions is not as simple as replicating the digital convenience offered in other industries. Instead, health plans that can find the right balance of digital and high-touch offerings and services (e.g., access navigation, payment, etc.) may have higher retention and engagement.
Improving broker engagement: Nearly all the revenue for commercial group business is still driven by brokers. With significant broker consolidation in past few years, health plans may need to shift their focus from traditional engagement with local brokers to a more data-driven approach with both local and national partners.

Health plans’ financial future may come down to the investments they make today

Some leading health plans have already chosen their organization’s business mix and required capabilities. Other health plans should complement the right business mix by investing in services and products that are affordable (e.g., right pricing; customized products), innovative (e.g., right mix of digital and high-touch benefits for consumer convenience), and efficient (e.g., use of analytics and AI for reducing medical and administrative costs). Some of these investments may bring health plans immediate financial returns, while others might accrue gradually over the long term in this ever-evolving market. According to the financial analysis, health plans have some choices to make when it comes to finding the right balance—and the sooner, the better.

Methodology

This report presents results from our analysis of annual statutory financial reports filed with state insurance departments from 2012 to 2022 by insurance companies operating within each state. For states other than California, we analyzed data obtained from the National Association of Insurance Commissioners databases. Due to California’s unique reporting requirements, we sourced data from the Department of Managed Health Care for California-domiciled health plans. For these California-domiciled health plans, underwriting profit/margin data is available only at an overall business level and is not available for separate lines of business. Hence, as used in this report, aggregate underwriting margins for various lines of business exclude California-based entities. This data was sourced through S&P Global Market Intelligence.

The study’s scope focuses on fully insured lines of business of US health plans, primarily commercial (small group, large group, and individual), MA, and Medicaid managed care. It excludes ASO businesses and a range of other ancillary health and nonhealth insurance, and noninsurance products and services offered by companies participating in this US health insurance market. In addition, the study uses financial data reported by insurers to states according to statutory accounting principles, rather than the generally accepted accounting principles (GAAP) reflected in public companies’ financial statements. There will, therefore, be differences in the results of this statutory data analysis compared to the financial reports of publicly traded health plans and other plans that provide public information based on GAAP.

Deloitte analysis of NAIC, DMHC filings; EIU Viewpoint demographic data.
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The authors would like to thank the following members from the project team: Wendy Gerhardt for providing invaluable guidance on shaping the project and reviewing the findings; Gargi Khandelwal for leading data preparation, contributing to the analysis and insights, and performing literature review for the paper; and Utkarsh Londhe for helping with data cleansing and preparation.

The authors would also like to thank David Mosher, Hector Calzada, Michael Cohen, and Ryan Hill for their expertise in shaping the research, as well as Laura DeSimio, Rebecca Knutsen, and Zion Bereket, and the many others who contributed to the success of this project.

Cover image by: Sofia Sergi

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